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Investors Echo Analysts' Pessimism on Software

Shares of software vendors plummeted Monday, erasing gains from last week as two analysts lowered estimates and another suggested Oracle (ORCL - Get Report) could warn this week.

Top software decliners included Iona Technologies (IONA), which lost $1.18, or 11.8%, to fall to $8.80, and BEA Systems (BEAS), which fell $1.18, or 11%, to $9.58 in recent trading.

i2 Technologies (ITWO) lost 31 cents, or 7.9%, to $3.64 and Veritas shares dropped $1.21, or 5.3%, to $21.46. PeopleSoft (PSFT) declined 94 cents, or 4.6%, to $19.59; Manugistics fell 33 cents, or 4.1%, to $7.58; Oracle dropped 31 cents, or 3.9%, to $7.61; and Siebel fell 43 cents, or 2.4%, to $17.82.

Lehman Brothers software analyst Neil Herman on Monday lowered ratings and estimates on several software stocks, citing comments from the AMR Research Conference last week that there are no near-term signs of significant improvement in the IT environment. UBS Warburg analyst Ken Carey lowered estimates but did not change his ratings.

Both analysts expressed concerns about Europe's extended summer holiday contributing to an even weaker-than-usual third quarter, which ends in September. Both said they expect third-quarter results to be flat sequentially.

In addition, CIBC World Markets analyst Melissa Eisenstat said she believes Oracle, whose fourth quarter ended Friday, could miss the consensus estimate for earnings per share of 12 cents and warn this week. Her forecast calls for Oracle to earn 11 cents a share. In the past, Oracle has issued a warning on the first business day after its quarter ends, which would be Monday.

Both Eisenstat and Herman said layoffs loom on Oracle's horizon. Citing a company spokeswoman, Reuters reported Monday that the company cut 200 developers -- or about 2% of its total development staff -- as part of a previously announced restructuring of its troubled applications business, which has suffered from bugs.

Herman said he also has heard from multiple sources that German software maker SAP (SAP) also will cut U.S. staff in the next several weeks.

Eisenstat, who has a hold rating on Oracle, said she has heard that field staff was trying to close deals under $10,000 in order to bring in some kind of revenue in the fourth quarter. These people have quotas that run into the millions of dollars and normally would be seeking six-figure deals, she said in her note. Her firm hasn't done any banking with Oracle.

Herman, meanwhile, lowered ratings to a buy from a strong buy on Advent Software (ADVS), BEA Systems, Iona, Mercury Interactive (MERQ) and Veritas. He reduced his rating on Micromuse (MUSE) even lower, to a market perform from a strong buy. He is maintaining strong buy ratings on only PeopleSoft, Embarcadero Technologies (EMBT) and Lawson Software (LWSN).

Lehman Brothers has done banking business with Advent, Iona and Lawson.

Herman said he believes the software stocks he covers are likely to be "dead money at best" for the next two quarters. He didn't downgrade them all to market perform because he believes investors with a long-term view may find their valuations "quite appealing." He said they offer significant potential upside for investors willing to wait one year.

Despite Herman's note following the AMR Research conference, the research firm did predict growth in the enterprise software market. Overall, AMR predicted revenue in the enterprise resource planning market would reach $31 million in 2006, up 47.6% from $21 billion in 2002.

Customer relationship management will experience growth rates between 25% and 30% in the next few years, reaching $26 billion in revenue by 2006, AMR forecast. And supply chain management will reach $13.6 billion in revenue by 2006, from $6.4 billion in 2002.

In the short term, though, concerns about Oracle and worries about the current quarter for other software firms could continue to weigh down even more on stock prices, UBS Warburg's Carey said in his note. Carey lowered quarterly and fiscal-year revenue and earnings numbers on Oracle, Siebel, Manugistics, Vignette (VIGN), Interwoven (IWOV) and E.piphany (EPNY). Of those, he lowered his price targets only on Siebel and Manugistics.

Carey lowered fiscal-year revenue and earnings estimates on PeopleSoft and i2 Technologies but did not change second-quarter numbers.

Carey said he still favors the stocks that he rates a strong buy -- BEA, Siebel and Vignette -- because of their balance sheets, competitive product positioning and the market opportunity he believes is ahead of the companies. He also said he likes Documentum (DCTM) and did not reduce his estimates for this stock, which he rates a buy, because it continues to execute well with a large installed base and low average selling price.

Carey's firm has done banking with Documentum and i2.

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